How to choose the best mutual fund scheme?
Mutual funds are ideal investment options for both risk-aggressive and risk-averse investors as they help to achieve investment goals easily and effectively.
Choosing the best mutual fund scheme irrespective of the various alternatives is a challenge in itself.
Both beginners and seasoned investors must take precautions while investing because of the immense risk involved.
You do not want to throw away your hard-earned money on just a hearsay scheme or a fund that offers average returns, especially when you have a scope of earning higher returns at less risk.
- 10 steps to choose the best mutual fund scheme
- Step 1: Identify Investment Goals
- Step 2: Determine Risk Tolerance
- Step 3: Look at the Time Horizon
- Step 4: Focus on the Fund Type – Growth or Dividend
- Step 5: Look at the Fees and Loads
- Step 6: Consider the Assets Under Active or Passive Management
- Step 7: Evaluate Managers and Past Results
- Step 8: Size of the Fund
- Step 9: Do not be Dependent Only on the History
- Step 10: Select What Matters
10 steps to choose the best mutual fund scheme
Step 1: Identify Investment Goals
Identify your investment goals by answering related questions like is the objective current income or long-term capital gain? Is the money for short-term like education expenses of children or future expenses like the retirement fund that is very far?
Identifying the investment goals helps to choose the mutual fund scheme that will fulfill the financial aspiration of the investor effectively.
Step 2: Determine Risk Tolerance
How much return are you expecting on your investment matters as it helps to determine whether the investor is a moderate or high-risk taker. Risk tolerance refers to the risk that the investor is willing to take with his investments.
It is now compulsory for all mutual fund houses to show the risk associated with the invested amount.
Step 3: Look at the Time Horizon
The time horizon is the period for which the investor desires to invest his money in a mutual fund scheme. It can be short or long term ranging from one day to even more than five years.
There are different fund categories meant for different time horizons and it is better to choose the best mutual fund scheme that will be able to meet your specific time horizons.
Step 4: Focus on the Fund Type – Growth or Dividend
Choose the fund type which is the best option to meet your specific needs. The growth option is best for long-term needs as it can handle higher volatility and risk factor. These funds also have greater potential for higher returns.
Dividend funds are short-term investment goals. They provide interest regularly and are considered stable investments with moderate returns.
Step 5: Look at the Fees and Loads
Some mutual funds charge a sales fee at either the time of purchase or sale of the investment known as a load. The purpose of the load is to cover the associated administrative charges and discourage turnover.
Mutual fund houses levy various charges which are paid by the investors, who must know about them in detail before choosing the mutual fund scheme for themselves.
Step 6: Consider the Assets Under Active or Passive Management
Determine the type of assets you want in your portfolio and then choose the mutual fund scheme accordingly.
Actively managed funds levy higher fees and try to outperform the benchmark index whereas passively managed funds levy lower fees and try to track the performance of a benchmark index.
Step 7: Evaluate Managers and Past Results
Conduct research about the fund’s history by asking yourself whether the fund has suffered more volatility than other major funds and whether the fund manager was able to deliver expected results.
Reviewing the fund’s prospectus gives a fair idea of its future and helps to choose the best fund.
Step 8: Size of the Fund
Although the size of the fund does not stop it from meeting the investment goals investors should keep it manageable for better handling.
Step 9: Do not be Dependent Only on the History
Although the fund history is an indicator of future performances it cannot guarantee high returns. Take related things also into consideration like comparison with the benchmark index, fund types, fees, risk factors, etc. before making a viable choice about the mutual fund scheme you want to invest in.
Step 10: Select What Matters
Investors must focus on things that matter for instance expense ratios, investment strategy, risk factors fees, and a chance of future success.
It is important to take the help of reputed platforms and understand the best ways of choosing the right mutual fund scheme for yourself.
Customer-friendly saving/ investment experts provide customized solutions, top-class security enables secured transactions, and a scientific fund tracker screens various financial scenarios to recommend the best out of the 4000+ mutual funds associated with the platform.
Every investor wants to choose the best mutual fund scheme but they must consider their individual preferences, investment objective, risk appetite, and the fundamental features of the scheme before making a final decision.